After getting pummeled last year, mortgage real estate investment trust exchange traded funds have recouped some of their lost ground and remain attractively priced.
Sterne Agee analysts Jason Weaver, Henry Coffey Jr., and Calvin Hotrum argue that mortgage REITs still offer attractive valuations, reports Michael Ide for ValueWalk.
“Price/Book ratios remain well south of their historical medians even in comparable periods of heightened interest rate volatility, and dividend yields now appear far more sustainable and attractive versus comparable asset classes,” the analysts said in a research note.
Specifically, the analysts point to enticing mortgage-related REITs like Two Harbors Investment Corp (TWO) and MFA Financial (MFA). REM includes a 4.7% position in TWO and 4.5% in MFA. MORT has a 5.8% allocation toward TWO and 4.2% toward MFA.
Looking at valuation metrics, the REM has a price-to-earnings ratio of 11.7 and a price-to-book of 1.0 while MORT has a P/E reading of 11.9 and a P/B of 1.0. In contrast, the S&P 500 index shows a P/E of 17.4 and a P/B of 2.4.
Mortgage REITs also offer attractive yields. REM has a 13.4% trailing 12-month yield while MORT has a 12.7% 12-month yield.
Moving forward, income investors are concerned about the negative effects of a rising rate environment. However, the Sterne Agee analyst point out that while the Federal Reserve is reducing its total mortgage-backed securities purchases, the supply of MBS has also declined due to slow refinancing activity and fewer home purchases. Consequently, in a low supply environment, coupled with the Fed’s continued policy of reinvesting MBS principal paydowns to offset tapering, the market may be in a better-than-expected position. [Mortgage REIT ETFs Look Attractive in Subdued Rate Environment]
Additionally, the analysts believe Fed chair Janet Yellen is unlikely to hike rates given the stubbornly high rate of unemployment. The U-6 unemployment/underemployment rate is still at 12.1%, the highest level in over 20 years. The U-6 number represents total unemployed, marginally attached workers and part timers, according to the Bureau of Labor Statistics.
iShares Mortgage Real Estate Capped ETF
For more information on real estate investment trusts, visit our REITs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.